There is very good chance of economic growth rebound

Releasing the World Economic Outlook report, International Monetary Fund (IMF) recently cut Nepal's economic growth target to 0.5 percent for 2015/16, the lowest in the last 14 years. The downward revision has come at a time when the government has been claiming that the economic growth will remain at 2 percent. Asian Development Bank has forecast 1.5 percent growth in the current fiscal year.

Sagar Ghimire of Republica talked with Kalpana Kochhar, Deputy Director in the Asia and Pacific Department of IMF, to know the reasons behind downward revision of Nepal's growth forecast as well as other economic issues of Nepal, at the IMF headquarters in the Washington DC in the second week of April on the sidelines of the 2016 Spring Meetings of the IMF and the World Bank Group. Excerpts:

IMF lowered Nepal's economic growth forecast to 0.5 percent against the government forecast of 2 percent. What led IMF to make such a pessimistic growth forecast?

The year has been very difficult for Nepal. It saw two large earthquakes followed by nearly five months of trade disruption in the borders. These factors have held back economic activities. Forecasting Nepal's growth is quite difficult because there are no quarterly growth numbers. What we have done is go through other available data to try and make an estimate growth figure. The indicators that we looked at are below average monsoon, export, which is down by nearly one-thirds, tourism, which is passing through a very difficult time, and trade disruption. Budget implementation is also being delayed partly because of political uncertainty. These are the reasons why we lowered growth forecast for this year. It's true that it is lower compared to the last several years. Once the reconstruction starts in earnest, the growth is expected to pick up. Already with the normalization of the border condition, we will see the pickup in economic activities. Once the government gets going, there is very good chance of growth rebound. It could even be stronger than in the past because reconstruction itself will add to the GDP.

What should be done to keep inflation close to that of India so that Nepal's competitiveness is not lost?

If you look at inflation of India and Nepal, you see they track very closely together. They deviate much from each other very rarely. Nepal's inflation is little bit higher whereas they always move toward the same direction. What you see now is a divergence because of the current condition of Nepal as you have massive shortages of things like fuel and food which was pushing up prices in recent time. These are extraordinary circumstances. Once these circumstances normalize, which is happening already, you should see it come back to where the normal path of Nepal's inflation tracks Indian inflation or a little bit higher.

There were talks about Nepal getting IMF's extended credit facility which comes at highly concessional lending terms. As this facility is targeted for countries with balance of payment needs, how Nepal with BoP surplus became qualified for this assistance?

Normally countries approach IMF when there is big balance of payment need. Nepal does not have that one. But, in our view, once the reconstruction activities kick off, there would be very big need for import. Second, the normalization of the blockade would also lead to rise in import. Nepal's BoP was impacted by the fact that the country was not being able to import anything during the blockade. Third, Nepal's remittances could be impacted. Nepal has sent a lot of workers to Malaysia. And Malaysia is starting to retrench the use of its foreign labors. Though Nepal does not have that many people in the Gulf region, there are countries suffering from oil prices. We think BoP surplus position could weaken as the remittances are likely to slow down at least in growth, import has started picking up after the end of blockade, and it will pick up during reconstruction. But, that does not mean that there will be crisis or like that. IMF's support is also for the current as well as the prospective BoP needs. So as long as we see there is need coming up, we can make case support for the program.

With the oil price downturn and Malaysia retrenching the use of foreign labor force, do you see the possibility of remittance flow being hit?

Remittance has typically been very stable source of foreign exchange reserve. However, the number of workers going abroad has been falling over the last several months because of slower hiring in oil exporting countries as well as other countries like Malaysia. We think that the remittance inflow will moderate quite a lot. We do not think that there would be oil price collapse. Going forward, at least for the foreseeable future, things will become stable again in Nepal. If Nepal's economy does well, there could be sources of jobs within Nepal instead of having to go overseas. In the short term, remittance will be under pressure. In the long term, if Nepal's growth prospect picks up, the outbound migration might diminish for good reasons.

Reconstruction activities have yet to gain pace. What help can Nepal expect from the IMF in regard to building the capacity of the government to boost its sluggish capital spending?

We are prepared to provide technical assistance on public finance management. IMF has lot of expertise in this area. If the government wants it, we can provide it possibly through the resident expert. We have already provided a lot of technical support and for countries like Nepal. There is a lot of goodwill in the international community toward Nepal. Reconstruction efforts have, of course, been hampered by the fact that you had this blockade. Now that the blockade has been lifted, I think there's an ample opportunity. As you know, a lot of money was pledged when Nepal hosted donors' conference right after the earthquakes in June. And so the money is there. There's a lot of will on the part of donors to finance reconstruction.

Why do you always keep asking Nepal to continue with currency peg with Indian currency?

Whenever country changes its exchange rate system, even a country like China when it goes from fixed to floating system, our advice to them is do it from the position of strength. Do it when your economy is strong, not when your economy is weak. Even inside IMF, we debate it from time to time on is pegging with the Indian currency the right regime. Given that India is the largest trading partner, you are landlocked and your trade should either go through India or China, inflation differential, we do believe that the peg is the best exchange rate regime for Nepal for the time being. Revisiting it to lower the pegging rate can be worth consideration. For that also, you need to work on other strong macroeconomic policies. If you simply devalue the Nepali rupee relative to the Indian currency and do nothing else, you can easily have a situation where the advantage that you get will be wasted because inflation in Nepal remains higher than in India. So if the government is prepared to have the support of macroeconomic policies, peg at the lower rate could be considered. But suddenly moving away from the peg is not the good idea at the moment.